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The Step Toward Becoming a More Disciplined Trader

Fausto Pugliese |
Tuesday, 10 July 2012 08:08 (EST)

In my experience teaching thousands of individuals to day trade, I’ve found that the ultimate determining factor in success is not experience, analytical ability, or risk tolerance. The secret ingredient in 99% of success stories is discipline. Some traders have a naturally disciplined disposition, others develop it over time. Achieving the discipline to follow the strict rules of day trading will not only limit your losses, it will maximize your gains. A few easy steps can get you on the right track, and the first one I always suggest is to never hold overnight positions.

The reason traders use the phrase “day trading” is because day traders open and close all positions during the same trading day. In other words, a true day trader starts each day with no open positions, makes trades during the course of that day, and ends each day like he started it – with no open positions, no exceptions!

This is a pretty easy rule to follow when you’re making money. If your trade is showing a positive return, it is not that hard to cash out the position by the end of the day and take your profits.

This rule becomes more difficult to follow when you are cashing out a losing position. For example, let’s say that you bought a stock late in the day at its support level, expecting to sell it as it bounced back up near its resistance level sometime before the closing bell. Yet, for some reason, the stock broke through its support level and now, you’re looking at a $1,000 loss on the trade as the closing looms.

In this case, holding onto the stock will be tempting as you hope that it resumes its normal trading pattern at the opening bell, getting you back close to where you started. A voice inside your head will say, “Hey, why close out a losing position that might turn into a winning position if I just wait an extra day?” Ignore that voice! It is the voice of potential financial ruin.

Hope, like all other emotions, has no place in trading. Trading is about facts, patterns, and numbers. Once you start trading based on your emotions, you start gambling.

Unfortunately, I have seen the catastrophic results of holding positions overnight. A friend of mine was down about $1,500 in a particular stock one day, which was an unusually large loss for him on a single stock. Rather than following the rational that disciplined traders abide by, he couldn’t bear to take the loss and spent the next night wishing for better luck in the morning.

After the bell, the company reported catastrophic news and the price of the stock to dropped $50 per share at the market open the following morning. My friend, who was holding 1,000 shares, had seen his original loss of $1,500 balloon into a $50,000 shortfall.

I wish that his $50k loss was the sad end to the story but it’s not. Desperate to recoup at least some of his investment, my friend then dumped the rest of his funds into the stock at the reduced price with the hope that just a small increase in the stock would make up for his original loss. Over the next few weeks, the stock fell another 80% in value. My friend was completely ruined, all because he decided to keep a stock overnight to dodge a relatively small loss.

This type of devastation will not happen every time a stock is held overnight, but just once can be enough to wipe out your entire life savings. This is why discipline is so paramount in day trading. The restraint to avoid the temptation of waiting “just one more day” can make all the difference.

Fausto Pugliese is the founder and president of Cyber Trading University, a world leader in online education and training for traders and investors in the markets. You can reach Fausto at faustop@ctucorp.com or follow him on Twitter and Facebook.

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